Fiscal Cliff Severity Downplayed By U.S. Ambassador David Jacobson

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DAVID JACOBSON SLIDE
U.S. Ambassador David Jacobson described the fiscal cliff more like a "fiscal slide." (CP, Shutterstock) | CP, Shutterstock

MONTREAL - The U.S. envoy to Canada sought to ease concerns within the Canadian business community on Tuesday by downplaying the scale of the so-called "fiscal cliff."

In a speech to a Canadian audience, David Jacobson said the media have been focused on the dramatic imagery of a cliff-like plunge when, in reality, he predicted the potential impact would actually be far gentler, in the short term.

"It's probably more like a fiscal slide," the U.S. ambassador told the Montreal Council on Foreign Relations.

"Taxes will go up, spending will go down, but it doesn't all happen on Jan. 1."

The fiscal cliff is a combination of deep spending cuts, federally mandated in 2010, and the expiration of the Bush tax cuts which would kick in barring a deal by the end of the year.

The U.S. Congressional Budget Office has estimated that the looming threat of those $7-trillion measures could reduce the country's overall GDP by 0.5 per cent, in the latter half of this year alone. It says the impact would be even greater in 2013.

Jacobson noted that even if Congress cannot reach an agreement by the New Year's deadline, the impact of the resulting tax increases and spending cuts wouldn't be felt immediately.

He said the effect would be felt gradually over the following months, spread out over the course of the fiscal year that ends Sept. 30.

While Jacobson downplayed the potential scope of the economic damage if Congress can't reach deal, he conceded that the failure would "definitely be playing with fire."

He also acknowledged that, since the election, it's understandable that Canadians would be watching the U.S. for signs of economic hiccups. The value of Canadian exports to the U.S. is pegged at 20 per cent of this country's total economy.

"This is the thing that is the most-important implication of the election for Canada: Can we get our economic house in order? Can we do well and therefore can you do well?" Jacobson said.

"It doesn't mean you can't do well without us, but it's sure a lot easier when the American economy is booming for the Canadian economy."

Last month's U.S. election produced a similar composition in Congress and the White House to the one that existed over the two previous years, as the American political system was plagued by partisan deadlock.

Both President Barack Obama and Republicans in Congress have now laid out some specifics of their vision for a fiscal settlement, but the plans are vastly different and leave politicians far from agreement with a deadline less than a month away.

A key point of contention is whether to allow the Bush-era tax cuts expire for higher-income earners — which the Democrats are insisting on and the Republicans are refusing.

Jacobson said he hopes Congress will be able to address some of its differences by the deadline, but he indicated that if it doesn't happen there's always a chance they can be ironed over a few days or even a week.

That is, he said, as long as people aren't screaming at each other.

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